Page 4 - 3. COMPILER QB - INDAS 16

Although A Ltd. has no legal obligation to restore the piece of land, it does have a constructive obligation, based

on its past practice and policies.
The amount of the obligation will be 1,420, being the present value of the anticipated future restoration
expenditure (10,000 x 0.142).

This will be recognised as a provision under non-current liabilities in the Balance Sheet of A Ltd. at 31st March,

2018.
As time passes the discounted amount unwinds. The unwinding of the discount for the year ended 31st March,

2018 will be 35.5 = (1,420 x 5% x 6/12).
The unwinding of the discount will be shown as a finance cost in the statement of profit or loss and the

closing provision will be 1,455.50 = (1,420 + 35.5).
The initial amount of the provision is included in the carrying amount of the non-current asset, which becomes

21,420 = (20,000 + 1,420).
The depreciation charge in profit or loss for the year ended 31st March, 2018 is 267.75 = (21,420 x 1/40 x6/12).

The closing balance included in non-current assets will be 21,152.25 = (21,420 – 267.75).

Q3 (Nov 18)

ABC Ltd is setting up a new refinery outside the city limits. In order to facilitate the construction of the

refinery and its operations, ABC Ltd. is required to incur expenditure on the construction /development of railway
siding, road and bridge. Though ABC Ltd. incurs (or contributes to) the expenditure on the construction/

development, it will not have ownership rights on these items and they are also available for use to other
entities and public at large. Whether ABC Ltd. can capitalise expenditure incurred on these items as property,

plant and equipment (PPE)? If yes, how should these items be depreciated and presented in the financial
statements of ABC Ltd. as per Ind AS?

SOLUTION

Ind AS 16 states that the cost of an item of property, plant and equipment shall be recognised as an asset if,

and only if:
(a) it is probable that future economic benefits associated with the item will flow to the entity; and

(b) the cost of the item can be measured reliably.
Further, paragraph 9 provides that the standard does not prescribe the unit of measure for recognition, i.e., what

constitutes an item of property, plant and equipment. Thus, judgment is required in applying the recognition
criteria to an entity‖s specific circumstances.

Paragraph 16, inter alia, states that the cost of an item of property, plant and equipment comprise any costs
directly attributable to bringing the asset to the location and condition necessary for it to be capable of

operating in the manner intended by management.
In the given case, railway siding, road and bridge are required to facilitate the construction of the refinery and

for its operations. Expenditure on these items is required to be incurred in order to get future economic benefits

3.3